The economic impact due to outbreak of Covid-19 is huge as consumers cut spending throughout the year. In the most affected sectors, the number of corporate layoffs and bankruptcies will be rising throughout 2020 says Mckinsey research.
The financial system is suffering significant distress, but a full-scale banking crisis is averted because of banks’ strong capitalization and the macro prudential supervision now in place says the research.
GDP contracts significantly is lowering in most major economies in 2020, and recovery begins only in Q2 2021.The researchers had conversations with hundreds of companies around the world on COVID-19 challenges that allowed Mckinsey to compile a view of the major work streams that companies are pursuing.
Companies have an imperative to act immediately to protect their employees, address business challenges and risks, and help to mitigate the outbreak in whatever ways they can. The research found that many companies are finding it hard to get the major actions right and have five major challenges ahead.
Having an intellectual understanding isn’t the same as internalizing the reality
Exponential case-count growth is hard to internalize unless you have experienced it before. Managers who haven’t experienced this or been through a “tabletop” simulation are finding it difficult to respond correctly. In particular, escalation mechanisms may be understood in theory, but companies are finding them hard to execute in reality, as the facts on the ground don’t always conform to what it says in the manual.
Employee safety is paramount, but mechanisms are ineffective
Policy making at many companies is scattershot, especially at those that haven’t yet seen the coronavirus directly. Many, such as professional-services and tech companies, lean very conservative: their protection mechanisms often add to a perception of safety without actually keeping people safer. Some companies aren’t thinking through the second-order effects of their policies. For example, a ban on travel without a concomitant work-from-home policy can make the office very crowded, leading to higher risk of transmission. Others are adopting company-wide policies without thinking through the needs of each location and each employee segment.
Optimism about the return of demand is dangerous
Being optimistic about demand recovery is a real problem, especially for companies with working-capital or liquidity shortages and those veering toward bankruptcy. Troubled organizations are more likely to believe in a faster recovery—or a shallower downturn. Facing up to the possibility of a deeper, more protracted downturn is essential, since the options available now, before a recession sets in, may be more palatable than those available later. For example, divestments to provide needed cash can be completed at a higher price today than in a few weeks or months.
Assumptions across the enterprise are misaligned
Some companies are pursuing their coronavirus responses strictly within organizational silos (for example, the procurement team is driving supply-chain efforts, sales and marketing teams are working on customer communications, and so on). But these teams have different assumptions and tend to get highly tactical, going deep in their own particular patch of weeds rather than thinking about what other parts of the company are doing—or about what might come next.
The near term is essential, but don’t lose focus on the longer term (which might be worse)
Immediate and effective response is, of course, vital. Researchers think that companies are by and large pursuing the right set of responses, as shown in above figure. But on many of these work streams, the longer-term dimensions are even more critical. Recession may set in. The disruption of the current outbreak is shifting industry structures. Credit markets may seize up, in spite of stimulus. Supply-chain resilience will be at a premium. It may sound impossible for management teams that are already working 18-hour days, but too few are dedicating the needed time and effort to responses focused on the longer term.
(Image Courtesy: www.wiseman.co.uk)